Jefferies’ Top Defence and Engineering Stock Picks: A Strategic Outlook
Jefferies’ Top Defence and Engineering Stock Picks
Brokerage firm Jefferies has identified its top four picks within the engineering and construction space: Hindustan Aeronautics Ltd. (HAL), Siemens Ltd., Larsen & Toubro Ltd., and KEI Industries Ltd. These recommendations come on the back of a significant increase in defence order flows, which rose by 89% year-on-year for stocks under Jefferies’ coverage universe.
Defence Stocks on the Radar
Jefferies expects operating leverage for most defence companies to continue playing out in the current financial year. The brokerage firm has a bullish outlook on the sector, citing high visibility ahead for power and defence stocks, as well as an improved outlook for railways.
Hindustan Aeronautics Ltd. (HAL)
Jefferies has a bull case price target of ₹7,500 on HAL, implying a 50% upside from current levels. The brokerage firm’s base case target of ₹6,475 implies a 30% upside potential. Key factors driving this outlook include:
- A visible order pipeline of up to ₹1.7 lakh crore, providing medium-term revenue visibility.
- The Make in India program gathering pace with a higher proportion of domestic orders.
However, Jefferies also highlights potential downside risks, including:
- Defence spending facing regulatory roadblocks.
- Ordering process slowing down.
- Margin pressure on execution.
Siemens Ltd.
Jefferies expects Siemens shares to touch levels of ₹4,500 as part of its bull case target, representing a 36% upside from current levels. The base case target of ₹3,700 implies a 12% upside potential. Key factors driving this outlook include:
- Exports rising at a faster pace to the parent company.
- Margins crossing previous peak levels.
- Asset turnover improving.
Downside risks for Siemens include:
- A downward surprise in margins.
- Exports to parent fizzling out.
- Debtor days, inventory days, and asset turnover not improving.
Larsen & Toubro Ltd.
Jefferies anticipates another 9% upmove in Larsen & Toubro shares as part of its base case scenario, with a price target of ₹3,965. This implies a Compounded Annual Growth Rate (CAGR) of 18% for L&T’s revenue and improving margin trends for its hydrocarbon and heavy engineering segments.
Key risks for L&T include:
- Domestic order flows not materialising.
- Higher than expected margin contraction.
KEI Industries Ltd.
KEI Industries has the highest upside potential among the four stocks in Jefferies’ bull case scenario, with a target of ₹5,625 implying a 59% potential upside. Jefferies expects KEI Industries’ earnings to compound at a 31% annualised rate over financial year 2025-2027.
Downside risks for KEI include:
- Exports and retail share in the overall revenue mix declining.
Conclusion and Future Outlook
Jefferies’ top picks in the defence and engineering space offer a compelling outlook, driven by factors such as increased defence order flows and operating leverage. However, investors should remain aware of potential downside risks, including regulatory roadblocks, margin pressure, and slower order flows.
As the sector continues to evolve, it will be crucial to monitor these stocks and adjust strategies accordingly. With a strong focus on the Make in India program and growing defence spending, these stocks may present attractive opportunities for investors.
